1Q24 net profit and revenue above; OCBC announces voluntary unconditional general offer for rest of GEH
- 1Q24 net profit and revenue surpassed expectations
- Net interest margin declined 2bps q/q to 2.27%
- OCBC announces SGD1.4bn voluntary unconditional general offer for its 11.56% stake in Great Eastern
- Maintain HOLD with higher TP of SGD14.90 as we roll forward our valuation base to FY25F
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Higher non-interest income supported by growth across fee, trading, and insurance income. Non-interest income is SGD1,189mn, 17% stronger y/y and up 47% q/q. Net fees and commissions came in at SGD479mn (+6% y/y, +4% q/q), driven by strong wealth fees, while loan, trade, guarantees and remittances, and other fees declined q/q. Trading income, which reached SGD370mn (+45% y/y, +67% q/q), saw income from customer flow hit a new record while non-customer flow income improved. Meanwhile, profit from GEH was significantly higher at SGD289mn (+21% y/y, +328% q/q) – this was the main driver for non-interest income this quarter, supported by better investment performance and an improved claims experience. GEH’s total weighted new sales improved +34% y/y, +2% q/q.
1Q24 saw lower credit costs of 16bps (4Q23: 21bps), as writeback in general allowances offset higher specific allowances. Total allowances were lower q/q at SGD169mn, 16bps (4Q23: SGD187mn, 21bps), as there was a writeback of general allowances (stage 1+2): -SGD11mn, -2bps (4Q23: SGD182mn, 21bps) alongside higher specific allowances (stage 3): SGD180mn, 18bps (4Q23: SGD5mn, 0bps). New non-performing asset (NPA) formation was higher q/q at SGD239mn (4Q23: SGD54m, FY23 averaged SGD101mn per quarter). The non-performing loan (NPL) ratio remained flat q/q at 1.0% and the allowance coverage declined to 146% (4Q23: 151%).
General offer for Great Eastern Holdings (GEH). OCBC has announced a SGD1.4bn voluntary unconditional general offer for the 11.56% stake in GEH that it does not currently own, with the intention to delist it. The offer price of SGD25.60 per share represents a 36.9% premium over GEH’s last traded price of SGD18.70 (before trading halt), representing 0.7x P/EV. In comparison, AIA and Prudential is trading at close to 1.3x/0.6x P/EV. AIA is trading at a premium to GEH due to higher growth as well as its larger scale of geographical operations. OCBC has previously failed twice to privatise GEH – once in 2004 and once in 2006. During 2006, the offer was at a 14% premium to the last traded price, at 1.5x P/EV. On a pro-forma FY23 basis, if 100% of GEH is acquired, this will boost OCBC’s return on equity (ROE) by 0.2%. Should the deal go through, we believe OCBC will have improved capacity and the ability to pay out dividends going forward – OCBC’s management previously alluded to GEH’s increased dividends and change in dividend payout policy being helpful to OCBC’s ongoing work on its capital position. Note that GEH is sitting on SGD6.3bn in cash/SGD8.5bn in retained earnings as of FY2023, compared to the SGD1.4bn (or potentially higher) acquisition price.
Takeaways from analyst briefing
NIM guidance revised up. 1Q24 exit NIM was 2.27% (same as 1Q24 NIM). Due to an increase in interest rate hedges during the quarter, OCBC’s sensitivity to interest rate hikes has declined. Management has provided a new sensitivity guidance that every 1bps change in the interest rate applicable to OCBC’s four major currencies will impact NII by SGD5-6mn on an annualised basis (previous guidance during 4Q23 results was SGD6-7mn). Previously management has assumed three to four rate cuts for the year, but now management guides for two rate cuts in 2H24. Hence, management has revised its NIM guidance to the higher end of the 2.20% to 2.25% range,
Other guidance maintained. Management continues to project low single-digit growth in loans, credit costs in the range of 20-25bps, and a 50% dividend payout ratio target.
Loan growth still slow. There are clear signs of loan demand rising, and management believes China is coming out of the low inventory situation with potential for growth in trade between China and intra-Asia. Currently, however, customers have yet to return and commit to making major investments. OCBC saw a pick-up in trade loans and flows into Singapore. Meanwhile, management is prudent with its low-single-digit loan growth guidance due to ongoing repayments.
Wealth continues to be a driver. Assets under management (AUM) grew by more than SGD10bn during the quarter on the revival of market valuations, of which SGD6bn came from net new money during the quarter. Management foresees more action from customers as markets become more favourable, but there are no signs of re-leveraging.
Details on new NPLs during 1Q24. Two to three of its corporate clients faced issues with loans, but this was not concentrated in any particular market – one NPL is in services and the other is in real estate. These contributed to specific allowances during the quarter. The HK CRE portfolio continues to have a low loan-to-value (LTV). Loans exposed to real estate assets a percentage of total loans of the group are not high.
ROE, capital, and dividends. Previous guidance for FY24F ROE was 13%-14%. Management now feels that ROE should be higher (1Q24 ROE at 14.7%). If GEH is completely privatised, ROE could increase further. The target operating range of the CET1 ratio continues to be unchanged at >14%. Management continues to look at inorganic opportunities complementary to OCBC’s core business/markets. Management is cognisant that its peers have engaged in bolt-on deals that have resulted in synergies and improved wealth and cards fees, amongst others.
Management’s view on general offer. Management highlighted that if they pay out capital, it removes room for growth in its bottom line. Meanwhile, management emphasised that the GEH deal does not expose OCBC to integration risk compared to buying a new business. It also believes there will be further synergies in working with a non-listed, 100%-owned company versus working with an independently listed company, as the former offers the management flexibility in reviewing the business further in the future.
| FY Dec | 1Q2023 | 4Q2023 | 1Q2024 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Net Interest Income | 2,338 | 2,462 | 2,437 | 4.2 | (1.0) |
| Non-Interest Income | 1,012 | 811 | 1,189 | 17.5 | 46.6 |
| Operating Income | 3,350 | 3,273 | 3,626 | 8.2 | 10.8 |
| Operating Expenses | (1,269) | (1,336) | (1,371) | 8.0 | 2.6 |
| Pre-Provision Profit | 2,081 | 1,937 | 2,255 | 8.4 | 16.4 |
| Provisions | (110) | (187) | (169) | 53.6 | (9.6) |
| Associates | 260 | 189 | 255 | (1.9) | 34.9 |
| Exceptionals | 0.00 | 0.00 | 0.00 | - | - |
| Pretax Profit | 2,231 | 1,939 | 2,341 | 4.9 | 20.7 |
| Taxation | (352) | (317) | (359) | 2.0 | 13.2 |
| Minority Interests | 0.00 | 0.00 | 0.00 | - | - |
| Net Profit | 1,879 | 1,622 | 1,982 | 5.5 | 22.2 |
| Growth(%) | |||||
| Net Interest Income Gth | (2.0) | 0.2 | (1.0) | 100 | nm |
| Net Profit Gth | 30.2 | (10.4) | 22.2 | -26 | nm |
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